How to Deal with Late Payments

When times are tough, customers take longer to pay their bills. You can count on it. Veteran entrepreneur Norm Brodsky says that's the wrong time to start thinking about how to deal with it.

Most of the entrepreneurs I know have been having a tough time getting customers to pay on time, which always happens in a bad economy. Some people get so nervous that they plead with, or even start harassing, their customers. That seldom works and invariably creates resentment on both sides. After all, customers are also under pressure. And they have extra reason to be annoyed if you've never discussed payment terms with them.

And chances are, you haven't. Many entrepreneurs, as well as most salespeople, make the mistake of thinking they've closed a sale when a prospective customer agrees to buy whatever it is they're selling. But no sale is final until the payment arrives—after all, a $10,000 receivable won't help with this week's payroll. Many people panic and do things like offering discounts to customers, who conclude they were previously being overcharged, or doing other things that damage their client relationships.

The long-term solution is to work out payment terms with customers at the start of the relationship. That way, you and your customers will be clear from the get-go. And that mutual understanding will completely change the nature of the discussions you're able to have later on, when the economy sours and receivables lengthen. If customers don't pay on time, you're in a much stronger position to press them or to work out new payment schedules. Should you give a customer additional time, you'll be doing him or her a favor, which will strengthen the relationship instead of undermining it.

And what if you haven't negotiated payment terms? At this point, there may not be much you can do to speed up customers' payments. So you may have to slow yours down accordingly. I'd turn to my vendors and explain the situation-your business is financially sound, but cash flow is a little tight, because everybody's paying late-and tell them that, until business improves, you'll be taking 15 more days than usual to pay your bills. If you've been a good customer, most vendors will acquiesce. As for those that yell and scream, I'd say, "Well, I understand your position. Maybe I'll just have to look for a new vendor. I don't want to, but I have to do what's best for my business." It's a rare vendor that won't relent.